TREASURY INSPECTOR GENERAL FOR TAX
ADMINISTRATION

RECOVERY ACT

Recovery Act Provisions for the Health Coverage Tax
Credit Were Implemented, but Development Processes Could Be Improved

May 25, 2010

Reference Number:2010-21-057

This
report has cleared the Treasury Inspector General for Tax Administration
disclosure review process and information determined to be restricted from
public release has been redacted from this document.

Redaction Legend:

1 = Tax Return/Return
Information

Phone Number |202-622-6500

Email Address |inquiries@tigta.treas.gov

Web Site|http://www.tigta.gov

HIGHLIGHTS

RECOVERY
ACT PROVISIONS FOR THE HEALTH COVERAGE TAX CREDIT WERE IMPLEMENTED, BUT
DEVELOPMENT PROCESSES COULD BE IMPROVED

Highlights

Final
Report issued on May 25, 2010

Highlights of
Report Number:2010-21-057 to the
Internal Revenue Service Commissioner for
the Wage and InvestmentDivision.

IMPACT ON TAXPAYERS

The improvements to the Health Coverage
Tax Credit included increasing the Government’s portion of health premiums paid
from 65 to 80 percent, reimbursing the taxpayers’ portion of premiums paid
during the enrollment period, allowing family members to continue receiving
benefits after certain life events, and expanding taxpayer eligibility in the Program.Effective implementation of these provisions
was critical to provide taxpayers the benefits mandated by the American Recovery and
Reinvestment Act of 2009 (Recovery Act).

WHY TIGTA DID THE AUDIT

This audit was initiated because the Recovery Act included provisions mandating
improvements to and expansion of the Health Coverage Tax Credit Program.The Health Coverage
Tax Credit Program provides income tax credits to subsidize health insurance coverage
for individuals displaced from their jobs under specific circumstances, which
ultimately resulted in loss of health insurance coverage benefits.Our
review assessed the extent to which the Recovery Act provisions were
implemented, Health Coverage Tax Credit system development was efficient and effective, and
benefits were provided to taxpayers.

WHAT
TIGTA FOUND

The Internal Revenue
Service (IRS) properly used Recovery Act funds to implement mandated provisions
to the Health Coverage Tax Credit Program.The provisions were completed as
mandated by legislation, the system was ready to process health care claims,
and benefits were provided to taxpayers.Specifically, in April 2009, the portions of health premiums paid
by the Government were increased from 65 to 80 percent.In August 2009, retroactive reimbursements
for premiums paid during enrollment were implemented.The remaining features will be rolled out
during Fiscal Years 2010 and 2011.

Although the Health Coverage Tax Credit Program Office appropriately
executed provisions, some project management practices needed improvement.Specifically, the Program’s system
development processes for requirements and configuration management need
strengthening, testing practices need improvement, and performance measures
targets should be updated using current Program estimates.Actions taken to strengthen the system development processes will improve the
effectiveness and efficiency of future upgrades to the Health Coverage Tax
Credit Program.

WHAT TIGTA RECOMMENDED

TIGTA recommended that the Commissioner,
Wage and Investment Division, ensure 1) full traceability on the requirements
traceability matrix, 2) all configuration changes are properly documented and
tracked, 3) in-depth analysis of test plans, and 4) performance measures targets are suitable for
assessing the effectiveness of the Program.

The
IRS agreed with our recommendations and stated corrective actions have been
taken or started.However, the IRS stated
that the inability to estimate targets did not diminish its ability to measure
outcomes or demonstrate Health Coverage Tax Credit
Program Office effectiveness.Because the
final Fiscal Year 2009 results included one performance measure (Customer
Service Representative Level of Service) that did not meet the performance
measures targets for the Health Coverage Tax Credit
Program, TIGTA questions whether the IRS had sufficient and timely information
to develop accurate performance measures targets with which to make risk-based
decisions in the Health
Coverage Tax Credit Program.

This report presents the results of our review of the Internal
Revenue Service’s (IRS) implementation of changes to the Health Coverage Tax
Credit (HCTC) Program.The American Recovery and Reinvestment Act of
2009 (Recovery Act)[1] included provisions for upgrading the
HCTC Program.The overall objective of this review was to determine whether the IRS established
and followed adequate system development processes to ensure efficient and
effective upgrades of the HCTC Program.This audit was part of our Fiscal Year 2009 annual
audit plan and addresses the major management challenge of Modernization of the
IRS.

The Recovery Act provides
separate funding to the Treasury Inspector General for Tax Administration
through September 30, 2013, to be used in oversight activities of IRS programs.This audit was conducted using Recovery Act
funds.

Management’s complete response to the draft report is
included as Appendix V.

Copies of this report are also being sent to
the IRS managers affected by the report recommendations.Please contact me at (202) 622-6510 if you
have questions or Alan R. Duncan, Assistant Inspector General for Audit
(Security and Information Technology Services), at (202) 622-5894.

The Health Coverage
Tax Credit (HCTC) Program is intended to address the long-term needs in
delivering health insurance benefits to a select group of individuals who might
otherwise be uninsured.For eligible
taxpayers, the HCTC Program makes heath care insurance more affordable by currently
paying 80 percent of the health insurance premiums.The HCTC was created by the Trade Adjustment
Assistance Reform Act of 2002,[2] and became effective in August 2003.The HCTC is a unique tax credit, whereby
participants can either receive payments on a monthly basis to help pay for
health insurance, or on a yearly basis when filing their income tax return, where
the credit will be applied as a refund or toward any taxes due.

The American Recovery and Reinvestment Act of 2009 (Recovery
Act)[3] mandated new provisions
to the HCTC.The Recovery Act changed
the HCTC by:

The HCTC is
designed to provide a Federal income tax credit subsidizing health coverage for
individuals who might otherwise be uninsured.

·Increasing
the portion of health insurance premiums paid by the Federal Government from 65
to 80 percent.

·Reimbursing
the participants’ portion of premiums paid during the enrollment period.

·Allowing
family members to continue receiving the HCTC after certain life events.

·Expanding
taxpayer eligibility in the Program.

The Internal Revenue
Service (IRS) created an HCTC Program Office to oversee the design,
development, and overall operations of the HCTC Program.This includes tracking and paying the Government’s portion of health insurance
premiums due for HCTC Program participants.The HCTC Program Office is also responsible for all phases of the
HCTC software development life cycle, beginning with a detailed analysis of
business and technical requirements and ending with system deployment.

Because the population of taxpayers enrolling in the HCTC Program
is continually increasing, outdated
system hardware presented a risk.The HCTC
Program Office deemed it necessary to upgrade the HCTC system and worked with a
contractor to make the needed improvements.The system upgrades to implement the Recovery Act mandates were
implemented in three phases.HCTC
Release[4] 9 focused on delivering the increased HCTC
and the retroactive health care premium reimbursements, and Release 10 focused
on the remaining Recovery Act provisions and hardware and software
upgrades.

The Recovery Act activities require a high
level of scrutiny and taxpayer dollars spent on economic recovery must be
subject to unprecedented levels of transparency and accountability.Federal agencies are required to ensure Recovery
Act funds are used for authorized purposes and appropriate measures are taken
to prevent fraud, waste, and abuse.As
such, the Treasury Inspector General for Tax Administration is required to
monitor the IRS implementation of Recovery Act provisions, and this
audit was conducted to meet those requirements.

This review was performed in the IRS HCTC
Program Office in Washington, D.C.,
and the contractor site in Reston,
Virginia, during the period May
through December 2009.We conducted this
performance audit in accordance with generally accepted government auditing
standards.Those standards require that
we plan and perform the audit to obtain sufficient, appropriate evidence to provide
a reasonable basis for our findings and conclusions based on our audit
objective.We believe that the evidence
obtained provides a reasonable basis for our findings and conclusions based on
our audit objective.Detailed
information on our audit objective, scope, and methodology is presented in
Appendix I.Major contributors to the
report are listed in Appendix II.

The
IRS effectively used Recovery Act funds to implement the mandated provisions to
the HCTC Program.Specifically, the Recovery
Act provisions were completed as mandated by
legislation, the HCTC system was ready to process health care claims, and
benefits were provided to taxpayers. In
March 2009, the HCTC Program Office, working in conjunction with the IRS
business owners, evaluated the Recovery Act legislative provisions and
initiated a plan for implementation.The
HCTC Program Office monitored and met the development milestone dates for both HCTC
Release 9 and 10.

Recovery Act provisions
were successfully implemented

The
IRS successfully developed three HCTC system releases to implement the Recovery
Act provisions.Beginning in April 2009,
the HCTC Program Office increased the credit percentage paid from 65 to 80
percent of qualified health insurance premiums.In August 2009, Release 9
delivered the increased tax credit and allowed for retroactive reimbursements
for health care premiums paid while enrolling in the monthly HCTC Program.Release 10 was implemented in December 2009 and increased
the eligibility for qualifying family members who would otherwise become ineligible
and lose health insurance coverage due to a change in the recipient’s Medicare
status or as a result of family death or divorce.Release
10 also included hardware and software upgrades to the HCTC system.

The HCTC
Program Office completed a number of HCTC project management business processes
to ensure provisions required by the Recovery Act were implemented and provided
the intended benefits to taxpayers.Review of available documentation demonstrated the HCTC project
team successfully implemented the HCTC project management plan.This
plan served as the overall guiding document used by the HCTC project team to
ensure the system materialized as mandated by the Recovery Act. The project plan outlined the project’s
objectives, parties involved in project planning and execution, and the overall
time period and delivery strategy for the project. These business practices
aided in ensuring the HCTC system was available to process health care claims.These practices included:

·Justifying
the need for the HCTC enhancements and reporting needed funding.

·Managing
requirements.

·Managing
risks.

·Managing
project schedule.

·Performing/conducting
peer reviews.

·Reporting
activities.

·Testing
strategy.

·Developing
a project management plan.

Benefits from changes to the HCTC Program are being
realized

The IRS effectively promoted and provided
HCTC benefits to taxpayers.The IRS
redesigned the HCTC Program Kit and Registration Form to simplify customer
registration and increase benefits to taxpayers, and enrollment in the HCTC Program increased
from 14,765 in April 2009 to
20,722 by January 2010.Additionally,
the new HCTC Program Kit reduced printing costs by one-half and created a
cost savings of approximately $100,000, with an additional cost savings of more
than 40 percent for future print orders.

In order to determine whether the HCTC
applies, there are education and outreach activities designed to assist
taxpayers (i.e., public service announcements were developed and underway in
certain States). The HCTC Program Office reports
positive feedback from use of these activities.
******1*******.

The HCTC Program
Office is responsible for
informing potential eligible taxpayers about the credit, enrolling eligible
applicants into the Program, and making payments to health plans on their
behalf.The intent of the Recovery Act
legislation related to the HCTC is to provide those American taxpayers who are
eligible with the opportunity to take advantage of this Program in order to
ease their economic stress.

Recovery Act funding for
the HCTC is being managed

The HCTC Program Office is actively monitoring expenditures to ensure
they do not exceed the funds obtained and executing measures to implement Program
requirements.Federal
agencies are required to ensure Recovery Act funds are used for authorized
purposes and appropriate measures are taken to prevent fraud, waste, error, and
abuse.The
Recovery Act reporting activities are designed to track Recovery Act tax
provision benefits.

As of September 30,
2009, the HCTC Program Office obligated and/or expended $15.2 million, or 67
percent of its $22.8 million base year budget.[5]A
spending plan was completed to project and track costs for each year of the
investment contract.By February 2011,
the HCTC Program Office forecasts the use of all Recovery Act funding on future
releases and additional functionalities. Calculating
the appropriate funding needed for the potential health coverage effort was a
challenge for HCTC Program executives.The funding needs were based on potential enrollment figures,which
were difficult to estimate.Although specific
funding for the HCTC Program was designated in the IRS 2009 budget, HCTC
Program executives were able to obtain additional Recovery Act funding of $80 million for Fiscal
Years (FY) 2009 – 2010 HCTC
business and technology investments.

While the mandated changes were successfully implemented and Recovery
Act funds were monitored, the development processes followed by the IRS to make
these changes could be improved.

Requirements Management is used for analyzing
and verifying whether an organization’s developed solution meets the needs of
customers and internal/external stakeholders.In a
combined effort, project team members and stakeholders identify organizational
objectives and constraints, as well as develop and facilitate program changes
and requirements.It also includes
requirements traceability which documents the life cycle of a requirement.

The requirements
traceability matrix for Release 9 was not all inclusive and needed further
development.Specifically, the matrix:

·Did not
trace to specific work products.

·Did not
trace all requirements to a test
case.

·Contained
one approved requirement erroneously tested by using a description different
from that as prescribed on the matrix.

Without complete traceability, the IRS cannot
ensure adequate development of requirements and tracing, potentially resulting
in requirements not being
satisfied. Missing
or invalid requirements could jeopardize the IRS’ ability to deliver health
insurance benefits to taxpayers and/or noncompliance with mandated HCTC
legislature.

The Software
Engineering Institute’s Capability Maturity Model Integration states projects
should maintain traceability between all source and product requirements.The Enterprise Life Cycle directs project teams to verify contractors
maintain traceability over project life cycle application requirements, thus
ensuring each one is mapped to its higher level requirement.

A complete tracing
of requirements was not accomplished due to the aggressive time period required
to implement the HCTC provision.The discrepancies involving insufficient
matrix traceability to work products and test cases were discussed with the HCTC
Program Office on September 11 and 25, 2009, but a subsequent review of the
final requirements traceability matrix determined the issues were still not corrected.

Signatures annotating matrix
approval are needed from all stakeholders

There
was no documented evidence that the baseline
requirements traceability matrix was approved.Specifically, the April 24, 2009, matrix did not have signatures from
either the Wage and Investment Division business sponsor or internal
stakeholders endorsing their review of the baseline requirements.To ensure the
system delivers the intended benefits and provides credible information, it is
imperative internal stakeholders approve the baseline requirements.

According
to the Enterprise Life Cycle, requirements management is the process where
baseline requirements are defined, formalized, managed, controlled, and
verified. The HCTC Program Office indicated there was not a formal process requiring business
sponsors or internal stakeholders to
provide signatures on the matrix.However, effective requirements management
builds upon the appropriately documented review and approval of baseline
requirements.

Management Action:During a September 11, 2009, discussion, the
HCTC project executive stated her single signature on the matrix represented an
overall acceptance by the HCTC Program Office business operations team lead personnel.Subsequently, the HCTC Program Office agreed
the matrix should contain documented signatures from the business sponsor and
internal stakeholders, concluding this change would take effect for the Release
10 matrix. The IRS subsequently reported
that the signatures of the Director, Electronic Tax Administration and
Refundable Credits; Systems Operations Lead; Business Operations Lead; Payment
Operations Lead; and Program Management Office Lead were included on the
Release 10 baseline requirements by December 4, 2009.

Recommendation

Recommendation
1:The Commissioner, Wage and Investment Division,
should ensure
that for ongoing and future system upgrades, the HCTC Program Officecompletes full
traceability on the requirements traceability matrix, including mapping of all
requirements to high-level requirements, and tracing to the final product
requirements.These include changes,
source codes, and any manual referencing accomplished.

Management’s Response:The IRS agreed with the recommendation.The IRS stated the recommendation outlines its standard processes and has
already taken action.The HCTC Program
Office completed full traceability of the Release 9 requirements traceability matrix
on August 19, 2009, following system implementation per its standard
process.The requirements traceability
report contains some requirements that do not call for mapping to test cases or
build components.

Office of Audit Comment:The IRS noted that corrective
action was accomplished during the review.However, documentation supporting the corrective action was not provided
to us during the review, so we were unable to validate the actions taken. As a
result, corrective action will be validated during the subsequent review of the
HCTC Program Office (Audit Number 201020101) currently in process.

The Change Control Log (a process used by the HCTC Program
Office for documenting all change requests) did not capture complete data for
documenting and tracking change requests. For example, the change control log
did not include the originator’s name or impact of the change request.Specifically, after creation of baseline requirements,
individual change request forms were not retained on requirements modified.Rather, the Change Control Log, which
provided a brief description and/or comment, was used for documenting change
requests.Additionally, the information
supporting approved change requests was not captured on the contractor’s database.The
September 25, 2009, control log contained 50 approved change requests; however,
according to the HCTC Program Office, information was not always captured in
the contractor’s database.

Change request forms contain project data and information necessary to
forecast program costs and schedules, resulting in a greater assurance for successful
delivery of the program’s intended benefits. The Configuration Management Plan
outlines the following processes for effecting change requests:

Identify potential change/error.

Document change/error.

Analyze change/error.

Obtain authorization.

Implement and migrate change.

Update
Requirements Traceability Matrix.

Although the Configuration Management Plan outlines change
control procedures, the HCTC configuration management process does not contain
specific guidelines to capture change request information, such as requestor’s
name, cost, and schedule impacts.The HCTC
Program Office maintained a Change Control Log which does not give specific or
pertinent change request information.Additionally, they relied on the contractor’s Application Management and Operating System to track and
support information on change requests. The Application Management Operating System database is used
to capture items that are changed in the production system, in accordance with
the Configuration Management
Plan.

Management Action:During a November 30, 2009, discussion, HCTC Program management agreed
the Change Control Log should
be modified to capture more data, specifically to incorporate the impact on cost
and schedule changes.Subsequently, the January
27, 2010, updated Change Control Log template reflected a modification to
include the impact of cost and schedule changes.

Recommendation

Recommendation
2:The Commissioner, Wage and Investment
Division, should ensure that for ongoing and future releases, the HCTC Program Office updates
the Configuration Management Plan to include procedures to verify all
configuration changes are properly documented and tracked.

Management’s Response:The IRS agreed with the recommendation, stating it has already implemented
additional corrective actions.As part
of the standard process, all change requests are documented in a change control
log during the development phase.All HCTC
Release 9 and Release 10 change requests were reviewed and approved by the HCTC
Program Office and had no effect on cost and schedule.Therefore, the IRS did not include those
metrics.Cost and schedule were included
in the change control log effective November 11, 2009. Further, the Configuration
Management Plan was updated January 29, 2010, to include a clear
differentiation of how change requests are managed during development,
maintenance, and operations.

Office of Audit Comment:The IRS noted that corrective
action was accomplished during the review.However, documentation supporting the corrective action was not provided
to us during the review, so we were unable to validate the actions taken.As a
result, corrective action will be validated during the subsequent review of the
HCTC Program Office (Audit Number 201020101) currently in process.

Various
testing and requirements management processes are needed to ensure functional
and technical specifications are met.These
processes are key management controls IRS executives use as credible
information upon which to base managerial decisions.

Additional
actions are needed to ensure a structured approach to testing

Results for Release 9 User Acceptance Testing disclosed that
test practices needed to be developed and test documents contained missing or incomplete information.The HCTC Program Office stated the timing of
requests and versioning of documentationcreated errors.Although HCTC Program personnel created a
central repository spreadsheet to collect test script data for all test
cases, the information was incomplete.On a query of the universe of 37,602 test scripts, 1,410 were missing expected test results which are
used by testers to conclude whether the test casespassed, failed, or were not tested. Additionally, there were two incomplete test
cycle control sheets.Further, in the
final test results documentation, it was noted that many test scripts were either
not clear or outdated.

Documentation for all tests must be
complete and contain sufficient information to ensure the test results can be
relied on to ensure the system is delivering its intended benefits and that
there are not any usability issues. To ensure effective and efficient Program
operation, the HCTC Program Office relies on contractor support in key areas,
one of which is testing.The Software Engineering Institute
Software Capability Maturity Model Integration outlines a series of processes and
tasks for project software testing.These processes include planning, resource allocation, test development,
and test effort and result monitoring.Tasks
include defining test cases, expected results, procedural steps, and tracing
test cases to their requirements.

Management Actions:During User
Acceptance Testing in August 2009, the HCTC Program Office and contractor
jointly tested and validated functional and business requirements.On September 22,
2009, we informed the HCTC Program Office of the insufficient strategy
practices used during User Acceptance Testing.The HCTC Program Office agreed that for Release 10, individuals selected
to perform the testing would have a greater knowledge of the HCTC system.Participants selected to perform Release 10 testing during the week of November
30, 2009, were composed of HCTC business users
(the IRS and contractor) representing each functional area of the scripts being
tested.Also noteworthy, a review of
tests developed for Release 10 was comprehensive in terms of scope, functionality,
technical coverage, and business participation. Test results were sufficiently documented.

Waived and deferred test cases should be approved
and documented

Numerous waived and
deferred test cases did not have a corresponding Test Case Waiver and
Deferral form, which is used to state the reason a test was not performed and document
the waiver/deferral approval via a relevant stakeholder’s signature.Without proper support and approval for
changes to test cases, business and functional requirements may not be
adequately tested to ensure the system provides the needed functionality.

The IRS’ Test Case Waiver and Deferral procedures define a waiver
request as eliminating the obligation, due to various reasons, for executing a
test case and thus altering the test plan.Test case requirements must either be approved for deletion and/or
verified as being included for testing in another test case.The IRS’ procedures outline processes for tailoring
a program specific Test Case Waiver and Deferral form to include the necessary format
for use in removing a particular test case or phase.Additionally, procedures require that all changes to test cases have a
corresponding rationale and approval.

During a September 11, 2009, audit discussion, the HCTC
Program Office stated it was unaware of IRS procedures requiring waived and
deferred test cases to have a corresponding Test Case Waiver and Deferral form.Additionally, personnel stated the waived test cases were a result
of the test scripts having already been tested and listed in templates for
prior HCTC releases.As such, performing
an in-depth analysis of test plans prior to beginning each Program release
would eliminate erroneously listing previously tested requirements.In the event a test case is erroneously
included, a corresponding Test Case Waiver and Deferral needs to
document the status.

Management Action:A copy of the Modernization and Information
Technology Services organization Test Case Waiver and Deferral Procedure, dated
November 2006, was provided to HCTC Program Office personnel during an October
26, 2009, audit discussion.On January
27, 2010, the HCTC Program Office provided two HCTC specific Test Case Waiver
and Deferral forms that were used to approve deferred test cases for Release
10.Management action taken
should resolve this issue.

Recommendation

Recommendation
3:The Commissioner, Wage and Investment
Division, should ensure that the HCTC Program Office performs an in-depth analysis of test plans prior to beginning each Program
release for elimination of previously tested requirements and, in the event a
test case is erroneously included, completes the Test Case Waiver and Deferral
form for approving its removal.

Management’s Response:The IRS agreed with the recommendationto implement a waiver and deferral process and has implemented
the corrective actions within HCTC Release 10.The IRS stated it completed the implementation of the waiver and
deferral process, peer review of test cases, and removal of test cases from
test plans that were no longer applicable.The process documented with Release 10 outlines the procedures for
authorizing the deferral or waiver of a test case, condition, script, or
scenario, and addresses documentation, submission, approval, and
signatures.

There
were scripts included in the Release 9 test plan that are no longer in scope
for the HCTC.These scripts represented
historical requirements that were never implemented, or are no longer
necessary, as well as requirements with no system impact.During Release 9, test scripts that were not
applicable were marked as “not tested” in the test script spreadsheet, per
existing processes.At the time of the
review, Release 9 scripts were correctly tested in accordance with the existing
process in place at the time.Prior to
Release 10 test execution, the test plan and detailed test scripts were updated
to remove the test scripts and other references that were no longer
applicable.

Office
of Audit Comment:The IRS noted that corrective
action was accomplished during the review.However, documentation supporting the corrective action was not provided
to us during the review, so we were unable to validate the actions taken.As a
result, corrective action will be validated during the subsequent review of the
HCTC Program Office (Audit Number 201020101) currently in process.

Although
the HCTC Program Office used satisfactory processes to determine performance
measures, they were unable to meet all performance measures targets. As documented in the results of the monthly
performance measure reviews, established measures did not consistently meet
monthly or FY 2009 targets.Specifically, the final FY 2009 results included one performance measure
(Customer Service Representative Level of Service) that did not meet the FY
2009 performance measures targets for the HCTC Program.As such, the IRS has already established a
risk stating the HCTC Program is not on track to meet annual performance
measures targets forecast for FYs 2009 through 2011.

The
Internal Revenue Manual requires targets being set for any measure to include a
review of statistics for the previous year’s results, historical patterns, and availability
of resources.Additionally, as priorities change and new program
requirements evolve, the suite of measures included in the budget must adjust
to changing circumstances.

The
original performance measures targets were established using Program statistics
prior to the new HCTC legislative requirements being passed in the Recovery
Act.Although these requirements significantly
increased the volume of enrollees in the HCTC Program, performance measures
targets were not created using the new data as a baseline.An accurate measurement of the Program’s
effectiveness cannot be accomplished when using obsolete targets.

Due
to the inaccurate targets used for performance measures, the HCTC Program
Office planned to conduct an assessment addressing the accuracy of the baseline
for FY 2011 once they determined population and operational volumes stabilized.However, launching a system of this nature in
a live setting is inherently risky and, therefore, adjusting the performance
baseline as soon as possible would provide a more accurate snapshot of system effectiveness.

Recommendation

Recommendation
4:The Commissioner, Wage and Investment
Division, should ensure that the HCTC Program Office uses current FY 2010 data to develop performance
measures targets for FY 2011.Additionally, applicable current fiscal year data should be used when
developing performance measures targets for future years to ensure accurate
representation of the HCTC Program’s effectiveness.

Management’s Response:The IRS agreed with the recommendation.The IRS acknowledges that new performance measures targets should be
established for FY 2011 and intends to baseline several of the performance
measures targets using FY 2010 data in order to develop new targets for FY 2011.However, the IRS stated that its inability to
estimate targets did not diminish its ability to measure outcomes or
demonstrate HCTC Program Office effectiveness.In FY 2009, agreement was obtained from the Wage and Investment
Division Operations Strategy Board and the Department of the Treasury that FY
2010 would be a baseline year for many of the performance measures
targets.Many of the HCTC measures are
based on workload and enrollee volumes, which fluctuated widely due to the
uncertain nature of the expanded HCTC population.The HCTC Program Office collects monthly
information and shares the results with IRS leadership and the Department of
the Treasury.

Office
of Audit Comment:The audit recommendation is intended to ensure the HCTC Program
Office uses current FY 2010 data to develop performance measures targets for FY
2011, which would provide better performance measures.Because
the final FY 2009 results included one performance measure (Customer Service
Representative Level of Service) that did not meet the performance measures
targets for the HCTC Program, we question whether the IRS had sufficient and
timely information to develop accurate performance measures targets with which
to make risk-based decisions in the HCTC Program. Updating performance measures targets provides
complete historical information needed for accurate rebaselining.

The overall
objective of this audit was to determine whether the IRS had established and
followed adequate system development processes to ensure efficient and
effective upgrades of the HCTC Program.Specifically, we determined whether the upgrades to the HCTC system 1)
were completed as mandated by legislation, 2) were ready to process HCTC
claims, and 3) provided the intended benefits to the IRS and taxpayers for the
filing season.To accomplish this
objective, we:

A.Determined whether testing support processes
for the releases were adequately planned for deployment.

1.Determined whether all entrance and exit
criteria were being met prior to initiating and exiting the various testing
cycles by obtaining and reviewing the final test reviews for each testing
cycle.

2.Determined whether the HCTC project team adequately
controlled waivers and deferrals during the various test cycles.

a)Obtained copies of the test case deviation
and waiver forms and determined whether they were processed and approved.All requests should be submitted in writing
using the test case deviation and waiver form.All approved requests should have Program-level signatures.

b)Determined the effect or impact of each test
waiver or deviation approved.

c)Ensured that deviation test cases from a test
cycle were subsequently tested.

3.Determined whether all aspects of the application were tested.

a)Matched the requirements listed in the
Program Improvement Form Requirement Report to the requirements listed in the
Requirements Traceability Verification Matrix.If there were mismatches, determined why, e.g., a change request added
or deleted a requirement, or the Requirements Traceability Verification Matrix was
not complete.

b)Verified that all requirements listed in the Requirements
Traceability Verification Matrix have a test case.If not, determined why and how these
requirements were verified and validated.

c)If specific requirements were not testable,
determined what type of assurance was provided to ensure that specific features
function as intended.

B.Determined whether requirements management
activities were adequately planned for and whether the system is ready to
process HCTC claims and provide the intended benefits to the IRS and taxpayers
as mandated by authorizing legislation.

1.Interviewed the HCTC Program Office to
determine how requirements were identified and validated based on the Recovery
Act.

II.Determined
whether the HCTC Program Office had adequately implemented the new legislation
mandates.

A.Interviewed
the HCTC Program Office to determine how performance measures were used to
determine Program success.

B.Reviewed
the performance measures results to determine whether service levels were met.

Internal controls methodology

Internal controls relate to management’s plans, methods,
and procedures used to meet their mission, goals, and objectives.Internal controls include the processes and
procedures for planning, organizing, directing, and controlling program
operations.They include the systems for
measuring, reporting, and monitoring program performance.We determined the following internal controls
were relevant to our audit objective:sound project management guidelines for developing and testing
requirements.We evaluated these controls by interviewing management and
reviewing requirements, testing documentation, and performance measures.

The medium for requesting approval to change a baselined
product or other controlled item.

Configuration Management

Involves establishing proper control over approved project
documentation, hardware, and software and assuring changes are authorized,
controlled, and tracked.

Deferral

An approved request for verification of a requirement or
set of requirements to be moved to another phase of testing.

Enterprise
Life Cycle

A structured business systems development method that
requires the preparation of specific work products during different phases of
the development process.The Enterprise
Life Cycle
establishes a set of repeatable processes and a system of reviews,
checkpoints, and milestones that reduce the risks of system development and
ensure alignment with the overall business strategy.

Filing Season

The period
from January through mid-April when most individual income tax returns are
filed.

Release

A specific edition of software.

Requirement

A
formalization of a need and is the statement of a capability or condition
that a system, subsystem, or system component must have or meet to satisfy a
contract, standard, or specification.

Requirements Traceability
Matrix

A matrix
developed and continually updated that links each requirement to a test case.The matrix provides important information
on system testing and functionality status.

Software Engineering Institute

A
Federally Funded Research and Development Center whose purpose is to help
others make measured improvements in their software engineering capabilities.

A
process improvement approach that provides organizations with the essential
elements of effective processes.

Test
Scripts

A
series of instructions written for, and specific to, performing each test
case.

Traceability

Traceability
of requirements can be established from the source requirement to its lower
level requirements and from the lower level requirements back to their
source.Such traceability helps
determine that all source requirements have been completely addressed and
that all lower level requirements can be traced to a valid source.

I reviewed the subject draft report and appreciate your acknowledgement
that the IRS' Health Coverage Tax Credit (HCTC) Program Office effectively
managed funds and implemented Recovery Act provisions. As your report states,
the Recovery Act provisions were completed as manda1ed by legislation, the HCTC
system was ready to process health care claims, and benefits were provided to
taxpayers. Your report also found that the HCTC Program Office is actively
monitoring expenditures to ensure they do not exceed the funds obtained, and is
executing measures to implement program requirements. We agree with your
recommendations and have already implemented several development process
corrective actions based on this review.

The IRS has administered the HCTC since it was created in
2002. The tax credit is designed to provide assistance in paying for health
insurance to a select group of individuals who might otherwise be uninsured.
For eligible taxpayers, the HCTC makes health care insurance more affordable by
paying 80 percent of the health insurance premiums (up from 65 percent prior to
the Recovery Act).

The Recovery Act provisions for HCTC included increasing the
IRS' portion of health premiums paid from 65 to 80 percent; reimbursing the taxpayers'
portion of premiums paid during the enrollment period; allowing family members
to continue receiving benefits after certain life events; and expanding
taxpayer eligibility in the Program.Effective
implementation of these provisions was critical to provide taxpayers the benefits
mandated by the Recovery Act.

We agree with most of your findings about the development
processes, including the need to complete test case waiver and deferral forms.
We have completed implementation of the corrective actions to address the
recommendations around requirements traceability, the configuration management
plan, and test plan analysis. For any issues found, and not addressed, during
Release 9.0, we implemented the corrective actions during Release 10.0.

We acknowledge that new performance measures targets should
be established for Fiscal Year 2011. However, we do not agree that our
inability to estimate targets diminishes our ability to measure outcomes or
demonstrate HCTC Program effectiveness.

Finally, the HCTC Program received unqualified approval from
the Wage and Investment Division Modernization Advisory Council for Recovery
Act implementation during both Releases 9.0 and 10.0. Independent Verification
& Validation by the Wage and Investment Business Systems Planning staff
provides continuous oversight for the HCTC Program and ensures all applicable
Enterprise Life Cycle milestones are satisfied.

Attached are our specific comments on your recommendations.
If you have any questions, please contact me, or a member of your staff may
contact Rinaldi Boykin, Acting Program Manager, Health Coverage Tax Credit,
Wage and Investment Division, at (202) 283-9600

Attachment

Attachment

RECOMMENDATION 1

The Commissioner, Wage and Investment Division, should
ensure that for ongoing and future system upgrades, the HCTC Program Office
completes full traceability on the requirements traceability matrix, including
mapping of all requirements to high-level requirements, and tracing to the
final product requirements. These include changes, source codes, and any manual
referencing accomplished.

CORRECTIVE ACTION

This recommendation outlines our standard processes;
therefore, we agree with the recommendation and have already addressed it. We
completed full traceability of the Release 9.0 requirements traceability
matrix, August 19, 2009, following system implementation, per our standard
processes. The requirements traceability report contains some requirements that
do not call for mapping to test cases or build components.

IMPLEMENTATION
DATE

N/A

RESPONSIBLE
OFFICIAL

N/A

CORRECTIVE ACTION
MONITORING PLAN

N/A

RECOMMENDATION 2

The Commissioner, Wage and Investment Division, should
ensure that for ongoing and future releases, the HCTC Program Office updates
the Configuration Management Plan to include procedures to verify all
configuration changes are properly documented and tracked.

CORRECTIVE ACTION

We agree with this recommendation and have already
implemented additional corrective actions. At the time of the Treasury
Inspector General for Tax Administration (TIGTA) review, we had many standard
configuration management processes in place.

As part of our standard process, we document all change
requests in a change control log, during the development phase. All Release 9.0
and Release 10.0 change requests were reviewed and approved by the Health
Coverage Tax Credit (HCTC) Office and had no effect on cost and schedule;
therefore, we did not include those metrics. Cost and schedule were included in
the change control log template, effective November 11, 2009

The Application Management Operating System database is used
to capture items that are changed in the production system, in accordance with
our Configuration Management Plan. During development phase, the approved
change requests are documented in the change control log, per our standard
processes.

The Configuration Management Plan was updated January 29,
2010, to include a clear differentiation of how change requests are managed
during development, maintenance, and operations.

IMPLEMENTATION
DATE

N/A

RESPONSIBLE OFFICIAL

N/A

CORRECTIVE ACTION
MONITORING PLAN

N/A

RECOMMENDATION 3

The Commissioner, Wage and Investment Division, should
ensure the HCTC Program Office performs an in-depth analysis of test plans
prior to beginning each program release for elimination of previously tested
requirements and. in the event a test case is erroneously included, completes
the Test Case Waiver and Deferral form for approving its removal.

CORRECTIVE ACTION

We agree with the recommendation to implement a waiver and
deferral process, and have implemented the corrective actions with Release
10.0. At the time of your review, we had vigorous testing processes, and as
noted below, we completed the implementation of the waiver and deferral
process, peer review of test cases, and removal of test cases, from test plans,
that were no longer applicable. As these processes existed, or were created for
Release 10.0, they are part of our standard procedures for future releases.

There were scripts that were included in the Release 9.0
test plan that are no longer in scope for HCTC. These scripts represented
historical requirements that were never implemented, or are no longer
necessary, as well as requirements with no system impact. During Release 9.0,
test scripts that were not applicable were marked as "not tested" in
the test script spreadsheet, per existing processes. At the time of your
review, Release 9.0 scripts were correctly tested in accordance with the
existing process in place at the time. Prior to Release 10.0 test execution,
the test plan and detailed test scripts were updated to remove the test scripts
and other references that were no longer applicable. A waiver and deferral
process was implemented to document and approve the reasons behind the decision
for not executing a particular test script. A peer review was conducted on this
test documentation, to confirm the removal of the invalid test scripts.

The process documented with Release 10.0 outlines the
procedures for authorizing the deferral or waiver of a test case, condition,
script or scenario; and addresses documentation, submission, approval, and
signatures. In addition, at the HCTC System Operations level, the process
specifies the procedures for creating a Change Request to track and document
the rationale for the waiver or deferral, the impacts on the system or business
teams, the test item for waiver or deferral consideration, and a process for obtaining
a decision on approval.

IMPLEMENTATION
DATE

N/A

RESPONSIBLE
OFFICIAL

N/A

CORRECTIVE ACTION
MONITORING PLAN

N/A

RECOMMENDATION 4

The Commissioner, Wage and Investment Division, should
ensure the HCTC Program Office use current Fiscal Year (FY) 2010 data to
develop performance measures targets for FY 2011. Additionally, applicable
current fiscal year data should be used when developing performance measures
targets for future years to ensure accurate representation of the HCTC
Program's effectiveness.

CORRECTIVE ACTION

We acknowledge that new performance measures targets should
be established for Fiscal Year 2011. However, we do not agree that our
inability to estimate targets diminishes our ability to measure outcomes or
demonstrate HCTC Program effectiveness. We intend to baseline several of our
performance measure targets using FY 2010 data in order to develop new targets for
FY 2011. Baselining should be completed by November 1, 2010.

In FY 2009, we obtained agreement from the Wage and
Investment (W&I) Division Operations Strategy Board and the Department of
the Treasury that FY 2010 would be a baseline year for many of our performance
measures targets. Many of the HCTC measures are based on workload and enrollee
volumes, which fluctuated widely this year due to the uncertain nature of the
expanded HCTC population. The HCTC Office collects up-to-date information,
monthly, and shares the results with Program leadership, W&I Senior
Leadership, and the Department of the Treasury. Our measures are very robust,
and we look forward to analyzing new baselines and establishing new performance
measure targets for the coming years.